A Closer Look at Plains All American Pipeline's Earnings

Plains All American Pipeline (NYS: PAA) reported third-quarter earnings after the market closed on Monday. Analysts were expecting earnings per unit of $0.55 and revenue of $9.68 billion. Plains recorded $0.27 per unit and $9.35 billion in revenue, but these numbers don't tell the whole story, so let's take a closer look.

What went wrong There's a lot to like in this earnings release, but what did go wrong really hurt Plains in the world of GAAP estimates. The partnership took a non-cash asset impairment charge to the tune of $125 million because of its decision not to proceed with the Pier 400 terminal project in Los Angeles.

This is a crude oil import and storage project that Plains picked up when it acquired Pacific Energy Partners in 2006. After initially planning to go forward in its development, the partnership listed a slew of reasons why Pier 400 is no longer a sound investment, including project delays, permitting hurdles, and the industry's changing outlook on the availability of domestic crude oil. Plains is not giving up on California entirely, however, and will continue to have a presence there.

Everything else looks very, very good Plains expected volumes in its Supply and Logistics segment to decline, but they didn't. Total volumes were up, and NGL volumes exceed management's expectations by about 50,000 barrels per day. As a result, revenue was up $500 million over last year. Plains credits the difference to stronger margins in the NGL business and favorable crude oil differentials. Management expects this segment to continue to benefit from crude oil differentials in the fourth quarter, while also experiencing a seasonal boost in NGL sales volumes.

Transportation volumes were up over 2011 levels, but shy of management's guidance. Nevertheless, profit for the segment came in at $190 million, which was slightly above guidance. Plains attributed lower volumes to the impact of Hurricane Isaac, and some volumes being diverted away from pipelines to rail in certain parts of North Dakota and Canada. Management anticipates this segment will perform in line with third-quarter performance, and issued fourth-quarter revenue guidance of $192 million.

Facilities volumes were more or less in line with management's guidance, but profit came in $27 million above the midpoint, at $142 million. This segment over-performed for a few reasons. First, volumes were up at some NGL facilities but, more importantly, higher-than-expected cost recovery on ethane sales from Plains' Canadian assets. Low ethane sales dinged a lot of midstream outfits in the second and third quarters this year after the price of the commodity plummeted. Finally, operating expenses were down on those same Canadian NGL assets. Management revenue from this segment to drop to $133 million in the fourth quarter, due to the seasonality of its gas storage business.

The distributions Third quarter distributions increased 9% over 2011's payout, to $0.5425 per unit. Plains hit it out of the park with its distributable free cash flow this quarter, recording $360 million and securing a distribution coverage ratio of 145%. The partnership has an excellent history here, increasing distributions in 32 of the last 34 quarters, including the last 13 consecutive.

In 2013, Plains is targeting another 7% to 8% distribution hike over the exit rate for 2012.

Foolish takeawayPlains joins Kinder Morgan (NYS: KMI) and Enterprise Products Partners (NYS: EPD) in an overall solid third quarter performance, as volumes were up at both its midstream peers, as well. Despite the charge taken for abandoning the Los Angeles project, there was a lot of positive news coming out of Plains' third quarter, and investors should keep this stock on their radar.

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